If you’ve been saving for retirement in a tax-deferred account, you may be subject to required minimum distributions (RMDs) one day — even if you don’t need the money.
RMDs are mandatory withdrawals you must take from certain retirement accounts after you reach age 70 1/2. (They’re sometimes referred to as minimum required distributions, or MRDs.) The RMD applies to accounts you contributed to on a pre-tax basis or that contain tax-deferred investment gains — such as traditional (non-Roth) IRAs, traditional (non-Roth) 401(k) or 403(b) accounts, Keogh accounts, SEP IRAs, SIMPLE IRAs and more.
You need to take your first RMD from your tax-deferred retirement accounts by April 1 of the year following the calendar year in which you turn 70 1/2. For example, if you turn 70 1/2 in 2017, you’ll have until April 1, 2018, to take your first RMD. In subsequent years, you need to take your annual RMD before Dec. 31. Note that this means you might take two RMDs in the first year. That can be problematic if it propels you into a higher tax bracket.
Your RMD doesn’t have to be a lumpsum withdrawal. You can take money out throughout the year as long as you have withdrawn the required amount before the deadline.
If you fail to take your RMD, the penalty is extremely harsh. The IRS can penalize you 50 percent of the amount of the RMD not taken by the deadline. So if you fail to take an RMD of $20,000 on time, the IRS can fine you a whopping $10,000.
So how is your RMD calculated? It’s based on the balance of your retirement account, as well as your age and the age of your spouse, if you have one. IRS tables can help you determine your RMD each year — and many companies that manage retirement accounts will calculate it for account holders. Some will let you set up automated annual withdrawals, too.
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